Gold Resource Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparative periods are the same periods in 2012. The company produces metal concentrates at the La Arista underground mine, part of its El Aguila Project in Oaxaca, Mexico.
Important context: The company states it has no proven or probable reserves under SEC Guide 7 and remains an exploration-stage company. Accordingly, it expenses mine and facility construction costs that reserve-holding mining companies may capitalize; its financial statements may not be directly comparable to theirs.
Key financial results
| Metric ($ millions, except per-share data) | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | 29.4 | 36.0 | 98.4 | 103.4 |
| Mine gross profit | 11.4 | 23.2 | 48.6 | 70.6 |
| Mine gross margin | 38.8% | 64.3% | 49.4% | 68.3% |
| Operating income (loss) | (1.9) | 13.0 | 9.7 | 42.7 |
| Net income (loss) | (1.8) | 6.9 | 4.2 | 24.5 |
| Basic earnings (loss) per share | $(0.03) | $0.13 | $0.08 | $0.46 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | 3.4 | 18.3 |
Q3 sales fell 18.3%; nine-month sales fell 4.8%. Lower realized metal prices were a principal driver: Q3 realized gold and silver prices were $1,240/oz and $19/oz, respectively, versus $1,769/oz and $32/oz a year earlier. Nine-month realized prices were $1,437/oz for gold and $25/oz for silver, compared with $1,690/oz and $31/oz.
Q3 production was 21,244 precious-metal gold-equivalent ounces, versus 22,336; nine-month production was 64,148 ounces, versus 66,649. Gold-equivalent ounces sold rose to 19,033 in Q3 from 18,059 and to 63,998 for nine months from 56,291. Non-GAAP cash cost after by-product credits was $756 per ounce sold for Q3 and $609 for nine months, compared with $467 and $396, respectively.
Financial position and cash flows
- At September 30, 2013, cash and cash equivalents were $17.6 million, down from $35.8 million at December 31, 2012. Working capital was $36.2 million, down from $46.0 million.
- Nine-month operating cash flow was $3.4 million. Investing cash outflow was $5.6 million, including $5.9 million of capital expenditures; financing cash outflow was $15.9 million, including $20.7 million of dividends, partly offset by $4.2 million of equipment-lease proceeds.
- Total liabilities were $20.3 million. Capital lease obligations totaled $4.2 million, comprising $1.5 million current and $2.8 million non-current. Management stated it had no debt outstanding; capital leases are separately reported.
- Current assets were $50.9 million and current liabilities were $14.7 million. Deferred tax assets totaled $34.0 million, including current and non-current amounts.
Material changes, outlook and risks
- Higher production costs and lower metal prices compressed margins and reduced earnings. Production costs rose to $17.3 million in Q3 from $12.3 million; nine-month production costs rose to $47.9 million from $31.8 million. Total costs and expenses increased 30.4% in Q3 and 39.4% for nine months.
- Management attributed cost increases to deeper mining, labor and contractor costs, repairs, safety, fuel, supplies, and mill expansion. Nine-month general and administrative expense rose to $13.3 million from $8.9 million; exploration expense rose to $8.2 million from $5.5 million; facilities and mine construction expense rose to $17.4 million from $13.5 million.
- The company expected commissioning of its mill expansion by year-end 2013, increasing nominal processing capacity from 900 to 1,500 tonnes per day. Reaching and sustaining that rate depends on sufficient mine output; management cautioned there is no assurance it can be achieved. The company expected lower sales versus 2012 to continue at least through Q4 if metal prices did not recover.
- The board reduced the monthly dividend from $0.06 to $0.03 per share effective April 2013. Nine-month dividends declared were $19.1 million, or 36.5% of non-GAAP cash flow from mine-site operations. Future dividends are not assured.
- Risks include volatile gold and silver prices, Mexican peso movements, operating and construction costs, mine development and grade variability, access to supplies and labor, and political, security, regulatory and community conditions in Mexico. The company reported no commodity-price hedges.
- The securities class action was dismissed with prejudice in July 2013, but the plaintiff gave notice of appeal. A related derivative action remains stayed pending the appeal; the company said it could not estimate a potential loss and is obligated to indemnify officers and directors for the litigation.
- Management reported disclosure controls and procedures were effective as of September 30, 2013. The filing says there were no material changes in internal control over financial reporting, “other than the control deficiency discussed above”; the provided filing text does not identify that deficiency clearly.
Investor verification priorities
- Verify whether the mill expansion was commissioned on schedule and whether mine development supported the targeted 1,500-tonne daily throughput.
- Track realized metal prices, grades, production costs, and cash cost per ounce, particularly given the sharp year-over-year margin decline.
- Assess cash generation and liquidity after dividends, exploration spending, construction costs, and capital-lease payments; confirm the board’s future dividend policy.
- Review the status and potential costs of the class-action appeal and derivative litigation, and clarify the internal-control deficiency reference.
- Evaluate the reserve-status caveat: the company states it has no SEC-defined reserves and gives no assurance on the duration or profitability of mining activity.